Small-business Q&A: Deal with risks early on

Published 11:20 pm, Friday, December 16, 2011

Q: I'm opening a new business but must go into debt to do it. Pretty scary! How can I protect myself?

A: Do your homework before you get started, which is another way of saying prepare a good business plan - and, the better the plan, the lower the risk.

Many who are just starting out claim they have no risk or just ignore it. There are always risks, and that's good, because, without it, the potential gain is minimized, if not eliminated. But, too little risk, just like too much, can sink a company before it ever gets off the ground. How can you walk the thin line and manage risk instead of having it manage you?

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Assess risk in your business plan. Ask yourself what could go wrong to adversely affect your business, and then clearly explain how you will deal with the risk. Choose a business form that gives you appropriate liability protection, and add plenty of contingency in your cash flow forecast for unplanned events.

Sometimes taking the risk and its financial burden is prudent. If you're a one-person graphic-design business, no employees are going to be injured on the job, nor are you likely to be sued for personal injury if clients infrequently visit your office. However, if you own a bakery that has 30 workers, you should be protected against employee injuries or a customer tossing his cookies after eating one of yours.

The basic business insurances are workers' compensation, general liability, auto and property/casualty, plus an added layer of protection over those, often called an umbrella policy. In addition to these, you also may need business interruption, key person, errors and omissions, life or disability insurance.

Establishing company policies to address potentially risky situations helps to defend yourself against a claim. If you demonstrate due diligence in protecting people and otherwise diffusing potentially risky situations, you're in a much more defensible position in the eyes of a judge or jury. Consider procedural policies for such things as employment practices, equipment management, and vehicle and workplace safety.

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Have a back-out plan so you close up shop if certain minimum performance parameters are not met by certain dates - break-even point, monthly sales, net monthly cash flow or whatever else makes sense for your business.

Risk analysis shouldn't stop after getting through a startup period. Your business environment will change. Create your own risk factor checklist and review it periodically.